MNI STATE OF PLAY: Ambiguity On Inflation Clouds RBA Rate View

The Reserve Bank of Australia has abandoned its yield targeting program for government bonds and has revised its inflation forecasts, but RBA Governor Philip Lowe insists that this does not mean that the central bank will raise interest rates before 2024.

After the Tuesday board meeting, at which the bank left interest rates on hold as expected at a record low 0.10%, the RBA's outlook has become ambiguous and will be determined by the progress of inflation to be "sustainably" within the banks' 2% to 3% target range, see: MNI STATE OF PLAY: Inflation Tests RBA Dovishness On Rates.

While insisting that the next rate rise may not be until 2024, Lowe said it was "also plausible" that a rate rise could be justified in 2023.

"There is genuine uncertainty as to the timing of future adjustments in the cash rate," Lowe said. "Given the information we currently have it is still entirely possible that the cash rate will remain at its current level until 2024, but it is also possible that an earlier move will be appropriate."

NOT TOO SOON

He almost ruled out a 2022 rise, saying market expectations for a rate hike next year were an "over reaction" to last week's inflation data, which saw trimmed mean inflation, the RBA's preferred measure, at 2.1% - the highest rate in more than five years.

The RBA now sees inflation reaching 2.5% at the end of 2023, only a slight increase on the 2.25% forecast in the last Statement on Monetary Policy in August. More will be known when the bank releases its latest Statement on Monetary Policy this Friday, though wage growth remains a focus as well.

On the yield target on government bonds maturing in April 2024, which the RBA chose not to defend on the market last week, Lowe said that its "effectiveness had declined" as a monetary policy tool given the uncertainty on the timing of the next rate rise and market expectations.

There was no change today to the RBA's main bond buying program, which Lowe confirmed would continue at the rate of AUD4 billion per week until mid-February. The April 2024 bond series would now be purchased as part of that program.